The dream of early retirement may sound tempting, but many Canadians will not be able to afford this luxury. Not only is there a real risk that they might outlive their retirement savings, but a new report out of the Montreal Economic Institute says early retirement will slow the economy if the trend is not put to a halt.

“It is essential to start the necessary reforms right away before demographic phenomena lead to lower economic growth that will reduce wealth creation in Quebec,” said Norma Kozhaya, an economist with the Montreal Economic Institute.

While the report is focused on the Quebec economy, the rest of the country faces the same problems associated with an aging population. The movement of the baby boom generation into retirement will create a labour shortage, the report contends. The effect would be higher labour costs, rising inflation and, with fewer workers, an eroded tax-base.

The report recommends not only that early retirement no longer be encouraged, but that “normal” retirement age be redefined as 67, rather than the long-standing traditional age of 65. Germany and the U.S. have already increased the normal age of retirement, and the U.K. is currently considering the move as well.

The report claims that Quebec faces the greatest risk, due to a birth rate below the national average and a tendency to retire earlier than elsewhere in Canada. The province could feel the crunch of a labour shortage as early as 2013.

“The average annual growth in real GDP per capita could be just 1.1% between 2020 and 2030, whereas it has been 1.6% in the last 25 years,” the report says.

R elated Stories

  • Evaluating an early retirement package: A checklist
  • For majority, retirement is a pipe-dream: Study
  • Retirement planning big priority for 30-year-olds: Study
  • Plan for “slow motion crisis” of an aging Canada, pension industry told
  • To encourage later retirement, the Montreal Economic Institute suggests the province raise the bonus it pays through the Quebec Pension Plan to those who retire after 65, from 0.5% per month to 0.7%.

    That’s the “carrot.” The think tank also recommends a policy “stick” of allowing private pension plans to penalize early retirement by introducing an actuarial reduction, beginning at age 55.

    Last week the Canadian Institute of Actuaries warned that most Canadians were unprepared for retirement, saving far too little to maintain their lifestyle after they stop working. According to the actuaries, to achieve 70% income replacement, the average 40-year-old earning an industrial wage would have to save 38% of his or her income.

    Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

    (06/18/07)